Mergers and acquisitions in the insurance industry

Anton Tchajkov, a corporate lawyer at Norton Rose Fulbright Canada, has published an article on the subject of mergers and acquisitions within the insurance industry. The opportunity for growth is cited as the main driver for many of these transactions. And yet a study conducted by The Boston Consulting Group entitled Value Creation in Insurance points out that most M&A transactions in North America and in Western Europe do not create value for the shareholders of the acquiring company. As noted in the study, to improve the odds that a merger or acquisition will deliver the promised benefits, the acquiring company should have a clear rationale for the transaction, possess the resources to integrate the acquired business, and conduct the necessary due diligence before completing the transaction.

Here in Canada, we have seen a wide variety of transactions over the years. Some transactions have worked out well. Some of these have brought together two carriers with similar cultures and with similar books of business. This allows for an easier integration of the acquired business. Other transactions have seen a large carrier acquire a smaller, specialty carrier in an effort to expand the product offerings of the acquiring company. The transactions along these lines that appear to have worked best are the ones where the acquired company retains some aspects of a separate identity.

There have been other M&A transactions that did not seem well thought out. There didn’t appear to be a rationale for bringing the two companies together in the first place. Two or three years after the transaction, much of the acquired business is no longer on the books and many of the staff of the acquired company have left. Looking back on some of these transactions is like watching a dog chase a car, catch it, and then realise it doesn’t know how to drive it.

There have been a couple of significant transactions within the past few months. First there was the purchase of Dominion of Canada by Travelers. Then there was the announcement that Desjardins Group plans to acquire the Canadian insurance business of State Farm. Time will tell whether these deals will create value for the acquiring companies.